How do musicians actually make their money?  This is a question I find myself asking a lot when thinking about music sales and streaming websites.  How do these outlets pay out to the artists they play and is the compensation for this fair?  When looking into this question it becomes immediately clear that there is a lot of opposition to the payout methods of Spotify and Pandora.  Artists have begun removing their music from them in a sort of bold protest to say that this compensation isn't fair to the artists that work to make the music.  Many writers and researchers have published articles and data to show exactly how the industry pays the artists and the data often leads one to the conclusion that the compensation just isn't fair.  I then ask if all of this information is available on how unfair the pay out in this industry is, how come the services are still so widely used and accepted?  This lead me to further investigate the issue and found statements from Spotify and Pandora about their compensation methods and how they have made the information regarding payout very clear and how it is indeed fair.  They present the numbers and show an unbiased presentation of the information.  I also found articles describing why the payout is so little when compared to actual radio payout comparing the potential amount of listeners being so astronomically different.  The points made in these articles made me reconsider some of my reasoning for believing the compensations are unfair.  With this new information I wanted to prove my side of the case but prove it with the facts of the situation, not the overtones and implications.

Artists and critics argue that Spotify and Pandora are not fairly paying out compensation to its musicians, so let us evaluate that claim.  In the article  "Songwriters: Spotify doesn't pay off ... unless you're a Taylor Swift", Doug Gross states "Pandora's published rate for at least one form of royalties is .0013 cents per stream, divided among a song's various interest holders."  What this means is that in Pandora, in at least one way, is paying "a song's interest holders" less than 1% of a penny per stream on their website.  This 1% doesn't just include the artists however, that 1% pay out encompasses the musicians, writers, publishers, and most importantly the record company.  Just hearing that stat itself can startle someone and immediately draw him or her to agree that this kind of payout just isn't fair, so maybe when getting the information from the horses mouth it will make more sense.  On Spotify.com in the section titled "Spotify Explained", they provide all of the information around their payouts and how they operate and make money.  In this section they state, "The average amount of money spent by US adults on music is $25, whereas the average Spotify user is worth $41 (our total revenue divided by our total # of users). Simply put, a Spotify customer is 1.6x more financially valuable than the average adult non-Spotify US music consumer."  This claim that the U.S. consumer on Spotify is worth 1.6x more than your typical non-Spotify user may be true, for those who benefit from it that is.  So if that is the case then one would need to examine the rate at which they pay back to the rights holders and look to where that revenue is going.

Further down the article it states that Spotify keeps 30% of the revenue and gives 70% back to its right holders.  "That 70% is split amongst the rights holders in accordance with the popularity of their music on the service. The label or publisher then divides these royalties and accounts to each artist depending on their individual deals."  This amount sounds good at first then you look at how this payout is calculated, because unlike Pandora it isn't on a per stream basis.  "Every time somebody listens to a song on Spotify it generates payments, but Spotify does not calculate royalties based upon a fixed "per play" rate."  ...  "Our payouts for individual artists have grown tremendously over time as a result of our user growth".  What I got from this is that Spotify pays out 70% back to the rights holders only however does not even pay these out on a per listen basis, they pool all the money made then use a formulation to which artists make which money.  If one wants to know how much they would calculate these payouts at if it were to be done on a per stream basis the answer is "an average "per stream" payout to rights holders of between $0.006 and $0.0084."  That stat is once again taken from their website explaining their own payout methods and it still seems shockingly small to me.  Not only do they not pay out a per stream basis, essentially you make what you earn, they proceed to pool the money and still provide artists with a hypothetically calculated per song payment of less than 1 penny of a dollar.  This could be due to a lack of income seeing as they are a relatively new market and could have a generally low income because of it, but of course this is not the case.  "Spotify's CEO Daniel Ek announced that we have now paid out over $3 billion in royalties with $300m of that coming in the first 3 months of 2015 alone."  This shows that Spotify is making ample money in order to provide artists fair compensation and is paying back 70% of its revenue to the rights holders of the music they stream, so the question then becomes about whether or not the rate of payout is too low and more revenue should be kicked back or if the revenue is fair then we need to assess why the artists still feel they are receiving little to no money.

When I start looking for the answers to the latter question its clear to see where the problem might be, the record labels.  All of the money kicked back by Spotify and Pandora doesn't directly go to the artist who performs it, however it goes to the rights holders of the song, being the record label.  The record label is then the body responsible for distributing this money to all those responsible for the song while also keeping a great deal of the money themselves.  In the article "Yes, Major Record Labels Are Keeping Nearly All The Money They Get From Spotify, Rather Than Giving It To Artists" the author Masnick provides graphs breaking down record label payouts to artists after taxes.  He claims "The labels end up with nearly 75% of the total payout, with actual artists and songwriters left with the scraps."  Masnick is telling us that after the initial payouts from distributing companies and taxes that the record labels still continue to keep 75% of the payout, giving the other 25% to be divided between all those responsible for producing, writing, making, and performing the music.  Before jumping to any conclusions about why they keep so much money I want to look at why they need it in the first place.

Diane Rapaport in the article "How Record Companies Make Money" breaks down the expenses of record companies into the costs of manufacturing, royalties, promotional, and distribution.  The first thing to do here is to get rid of the thought of royalty costs because we only want to look at the 75% of the money that the label keeps from artists, not the money they are paying.  So we need to first look at manufacturing the CD's that record companies send to stores for sale.  "Major labels pay approximately $.50 to $.55 per CD. Independent labels that order more than 100,000 CDs a year pay approximately $.65 per CD".  So these major record labels are paying about half of a dollar for every record they buy, meaning that if an artist were to go platinum the record company only paid $500,000 to buy all of those CD's.  That number sounds a little high but when we look at the price they sell the CD's to distributors for it doesn't seem so high anymore.  "At common discounts, record companies receive approximately $10.00 per CD ($16.95 SLRP). "  First to clarify, SLRP stands for the suggested list retail price, the price you the consumer buy the CD for at the store.  Knowing this we can see that record labels are selling their CD's to ground distributors for $10 a CD and only pay .50 cents for them, meaning a $9.50 profit on every single CD sold.  This would mean that in the 1,000,000 CD's sold to go platinum they would spend $500,000 on the CD's and sell them for $9.5 million dollars, a decent profit most would say.  So what do the other costs add up to?

The next big cost bracket is the costs associated with promotion.  Rapaport says "Major labels budget approximately 20% of annual gross income for promotion and selectively allocate the funds according to sales projections for each artist".  Okay so now we can use this to cover where the next 20% of the revenue goes from the 75% that the record company keeps.  This 20% of the overall revenue goes to promoting the artists with ads, websites, radio promotions, videos, and many more things.  What this boils down to is the record label spending money in order for their artists to produce more album sales which means more revenue for the record company and not that much more revenue for the artist.  The upside to the promotion for the artist is that these attempts can result in artists seeing a rise in ticket sales and merchandise sales, the way artists can truly make money, but it comes at a cost to them.  "Out of this the record company will spend approximately $625.000 in manufacturing costs; approximately $1,000,000 in promotion (another $1,000,000 will be charged against artist royalties)".  Lets get this straight, the record company not only takes money from the artists earnings to promote them and manufacture product, but when it comes to promotional costs they take an extra $1,000,000 from the artists earned royalties as a way of having them help pay for the promotion that they did for the artist.  This does sound fair that an artist should have to help pay for their own promotion but that doesn't matter when the record label is already taking money from them to provide a service, then they are now being charged extra for that service to be provided.  The record label charges the artist for everything they do, as well as recording costs, then take away more money from their earned royalties, that they are only seeing a slim portion of anyways.  Having all this information on how record labels are mistreating the artists it becomes a little clearer where the money is getting lost in translation with the streaming websites.

With new information regarding the payout methods of Spotify, and seeing where the actual disconnect exists in the transfer of money from Spotify's payout to the artists, I am led to look at whether or not the Spotify model is our future of music and look at the impact it has actually had on artist pay when compared to the old model.  In the article "Maybe Spotify Isn't Killing the Music Industry After All", the author Andrew Flowers addresses the fact that perhaps Spotify isn't hurting the music industry, but can in some cases be helping it.  "They found that revenue roughly offsets the revenue lost from any drop in sales. In other words, they think Spotify has had a revenue-neutral impact on the music industry".  Here Flowers is discussing the results of a study done on Spotify by the economists Joel Waldfogel and Luis Aguiar where they determined that Spotify perhaps has more of a positive impact than we know.  They argue here that with the fall in record sales we have seen since the digitalization of music that Spotify has in fact not taken any money away from artist but still maintains to keep the status quo of payment between record sales dropping and people moving to the new platforms.  The economists also clash with leaders of the anti-spotify movement in almost every way except in when looking at the impacts it has had on pirating music.  "Every additional 47 streams displaced one pirated download, they concluded. The economists even cited Page's own work showing Spotify lowered unpaid downloads."  So Spotify not only has been paying out $2 billion in royalties, keep the music market at the same rate as before, but they also have successfully lowered illegally downloaded music.  With all that Spotify is doing right and knowing what we know about record companies its very clear where the disconnect lies in whether or not musicians are fairly compensated by the streaming industry, and it lies with the record companies.

When looking and examining all the evidence around music streaming and Spotify's compensation methods it just doesn't make any sense that Spotify would be the direct reason behind the unfair compensation that the artists have been receiving from the outlet.  The easy answer to the question is that Spotify doesn't fairly compensate and though this is true in some aspects the true problem is the record labels.  The record labels take the money that Spotify pays out because they are technically the rights holders of that music, leaving the artists who perform and write the music to be at the mercy of their master for a fear of biting the hand that feeds them.  They are absolutely being compensated unfairly but it isn't Spotify's fault that this is the case.  The record companies take the money and withholds 75% of it from the rights holders in order to compensate themselves for their expenses, which as I've shown does not add up correctly.  They then give this 25% left to the rights holders, which includes all those responsible for making the track.  By the time this gets divvied up between these people the actual performers of the track are making little to no money off of it.  Spotify gives its best effort to compensate artists fairly but because of the record labels in charge; they remain unable to do so.  

